With the extreme volatility that the market has seen lately, I would like to look at some alternative plays in the most defensive industries. I have long been of the opinion that owning several companies in an industry that you are bullish on is a great tactic. Not only does this strategy help with overall diversification, but there are many situations where one industry may present multiple valuable investments. Throughout this article I will be looking for these opportunities in the soft drink, fast food, healthcare, and the diversified foods industries.
|Ticker||Market Cap||P/E(Trailing -Forward)||Yield||Payout Ratio||Levered Free Cash Flow Payout Ratio||Years Increasing Dividends||5 Year Average Annual Growth||Price to Owner's Earnings|
|161.85 Billion||13.13-16.43||2.60%||34%||124%||49 Years||9.5%||46.58|
|95.84 Billion||15.41-12.41||3.30%||48%||74%||39 Years||13.7%||21.86|
|91.63 Billion||17.97-15.53||2.80%||48%||72%||34 Years||27.5%||26.06|
|Yum! Brands |
|25.44 Billion||22.00-17.06||2.10%||39%||45%||7 Years||19.3%||23.37|
|Johnson and Johnson |
|175.77 Billion||15.34-12.12||3.50%||52%||62%||49 Years||10.6%||16.38|
|99.36 Billion||34.75 -8.40||4.70%||162%||44%||0||0||16.90|
|Flowers Foods |
*I have decided to start looking at potential investments with a new metric; Price to Owner’s Earnings. I came across this strategy after reading this great article on the subject.
Non-Alcoholic Beverages: This industry is completely dominated by two major players; Coca-Cola and PepsiCo. I’m quite sure that no amount of recessionary talk will prevent consumers from purchasing these soft drinks. Both companies provide their investors with solid yields above the S&P 500’s average.
Coca-Cola (KO) is the world’s largest international beverage company with a presence in over 200 countries. Coke has a 2.70% dividend yield, with a consistent record of paying and increasing its dividend. KO has a payout ratio of 34% and a solid 5 year average annual growth rate of 9.5%. Over the past 48 years the company has been able to consistently issue and raise its dividend. Coke is a worldwide company with tremendous brand exposure. You could find a bottle of coke in the most isolated places in the world.
PepsiCo (PEP) is another great company in this industry. While it is not as big as KO, it still has a market cap of over 99 billion. Looking at forward P/E ratios, PepsiCo is actually trading at a discount to Coke. PEP also provides a higher dividend yield at 3.30% and a lower FCF payout ratio. It has been increasing dividends for the past 39 years and has a 13.7% 5 year average annual growth rate. Moreover, Pepsi has a much lower price to owner’s earnings multiple at 21.86 compared with KO’s 46.58.
Fast Food Restaurants: Unfortunately for the world's waste lines, it seems that the higher the possibility of recession, the stronger the fast food industry becomes. The fast food industry has continually proven its value when times are tough. It should be apparent that the average consumers are willing to sacrifice nights out on the town for the inexpensive appeal of Big Macs.
McDonald's (MCD), with a market cap of $90 billion, is the largest fast food company in the world. It has a presence in 119 countries with some 32,000 restaurants. McDonald's business has proven to be very recession resistant. The company is trading at a 17.97 trailing multiple and a forward P/E ratio of 15.53. At these prices it currently has a 2.80% dividend yield with a payout ratio of 48% and a FCF ratio of 72%. Both of these ratios are at acceptable levels. MCD has been increasing its dividend payouts for 34 consecutive years. It has one of the highest 5 year average annual growth rates at 27.5%. One of the major reasons I am a big proponent of MCD is because of its tremendous international exposure. McDonald's is a large player in emerging markets. In fact, McDonald's is often seen as a symbol of globalization and the American way of life. At the beginning of the year 39% of revenues came from the U.S., 41% from Europe, and 19% from APMEA (Asia, Pacific, Middle East, and Africa) region. The APMEA is the fastest growing sector in the company.
YUM! Brands (YUM) operates as a fast food restaurant company in the United States and internationally. These include KFC, Taco Bell, and Pizza Hut. In terms of store locations, it is the largest fast food company in the world with over 38000+ locations. When looking at its P/E ratios it is trading at a slight premium to McDonald's. MCD also outclasses it in terms of dividend yield, as YUM only has a yield of 2.10%. It has increased this dividend consistently since 2004. Moreover, in the last 5 years it has increased its payout at a rate of 19.3%. One area where it is slightly superior to McDonald's is in the price to owner’s earnings multiple. YUM is trading around a multiple of 23 while MCD is near 26. The company also has fantastic international exposure with locations in 110 countries. This cannot be made more clear than by taking a look at the company’s presence in the biggest emerging market of all-- China. At present, YUM has over 3300 KFCs in over 700 Chinese cities. Think about it this way-- YUM opens a new KFC in China nearly every day of the year. Its stated goal is to eventually have over 20,000 locations in China. This one area will provide for an abundant amount of growth for YUM.
Healthcare: It should be quite obvious to anyone that your physical health does not care whether the economy is in a boom or bust mode. Healthcare companies have long been proven to be very recession resistant. In fact, in the latest terrible jobs report, healthcare was one of the few bright spots as it actually added jobs.
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the healthcare field worldwide. I am really starting to believe that JNJ is the best in show when it comes to the healthcare sector. It is currently trading at 15.34 x past earnings and 12.12 x future earnings. It has a solid dividend yield of 3.50% and has consistently increased its payout for 49 years. JNJ also has a very solid payout and FCF payout ratios at 52% and 62% respectively. Additionally, it has a very sustainable 10.7% 5 year average annual growth rate.
Merck (MRK) provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. In my mind, Merck is a far more speculative play than JNJ. Its trailing twelve month P/E ratio is much higher at 34.75. However, MRK’s expected future P/E ratio of 8.40 is below JNJ's. Merck rewards its investors with a higher dividend yield of 4.70%. Unfortunately, even though the company has paid a dividend for the past 41 years, it has not increased it since 2004. It is trading at a very similar price to owner earnings multiple as Johnson and Johnson.
Food Processing: This industry has proven to be extremely recession resistant. Consumers will cut back on nearly all expenditures before they cut back on food. This is why I have included 2 companies from different sections of the food processing industry.
Kellogg (K) and its subsidiaries manufacture and market ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. Its principal products include cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles, and veggie foods. Kellogg has a market cap of 19.36 billion with P/E ratios of 16.02-14.11. Kellogg rewards investors with a 3.20% dividend yield. It has a solid payout ratio of 48%, however its FCF is a bit high at 84%. Over the past 5 years its average dividend growth was 8%. The company has been increasing its payments for 7 straight years. Also it is trading at a discount to FLO in terms of price to owner earnings multiple.
Flower Foods (FLO) operates 39 bakeries that produce breads, buns, rolls, snack cakes, and pastries. Flower’s products are sold regionally through an extensive direct-store-delivery network that encompasses the southeastern, mid-Atlantic, and southwest U.S., plus select markets in California and Nevada, and nationwide through other delivery systems. In terms of P/E multiples, Flower Foods is trading at a slight premium to Kellogg. FLO has the same dividend yield as K at 3.20%. Flower has very solid payout ratios at 53% and 60% respectively. This lets us know that there is still a lot of room for the dividend to grow. It has been increasing its dividends for a 10 year period. Over the last 5 years it has been growing at a very high 24.8%. This high rate of dividend growth for a small company needs to be watched as it may not be sustainable.